[Federal Register Volume 82, Number 160 (Monday, August 21, 2017)]
[Rules and Regulations]
[Pages 39491-39506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17447]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 82, No. 160 / Monday, August 21, 2017 / Rules
and Regulations
[[Page 39491]]
SMALL BUSINESS ADMINISTRATION
13 CFR Parts 109, 115, and 120
RIN 3245-AF85
Miscellaneous Amendments to Business Loan Programs and Surety
Bond Guarantee Program
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: This final rule amends SBA regulations to update, streamline
and clarify rules for the Business Loan Programs (as defined below) and
the Surety Bond Guarantee Program (``SBG''). For purposes of this rule,
the 7(a) Loan Program, the Microloan Program, the Intermediary Lending
Pilot (ILP) Program, and the Development Company Loan Program (``504
Loan Program'') are collectively referred to as the ``Business Loan
Programs.''
DATES: This rule is effective September 20, 2017, except for the
amendment to Sec. 120.1400(a), which is effective October 20, 2017.
FOR FURTHER INFORMATION CONTACT: Robert Carpenter, Acting Chief, 7(a)
Program and Policy Branch, Office of Financial Assistance, Office of
Capital Access, Small Business Administration, 409 Third Street SW.,
Washington, DC 20416; telephone: (202) 205-7654; email:
robert.carpenter@sba.gov.
SUPPLEMENTARY INFORMATION:
I. Background
The SBA programs that are affected by this final rule are: (1) The
7(a) Loan Program; (2) the Microloan Program; (3) the Intermediary
Lending Pilot (ILP) Program; (4) the 504 Loan Program, and (5) the
Surety Bond Guarantee (``SBG'') Program.
SBA published in the Federal Register (81 FR 52595, August 9, 2016)
a proposed rule containing proposed regulatory revisions for the 7(a)
Loan Program, the Microloan Program, the 504 Loan Program, and the SBG
Program. The ILP Program was inadvertently omitted from the proposed
rule; therefore, changes to the ILP Program were added to this final
rule to maintain consistency across SBA loan programs. The comment
period ended October 11, 2016.
II. Summary of Comments
The Agency reviewed the public comments it received concerning its
proposed rule changes for 13 CFR parts 115 and 120. The comment review
of specific final rule changes for the 7(a) Loan Program, the Microloan
Program, the 504 Loan Program, and the SBG Program is summarized as
follows:
SBA received 57 comment submissions, of which two were duplicates
from the same commenter. The 55 net comments were reviewed by the
Agency.
The comments submitted consisted of 20 from Certified Development
Companies (CDCs), 15 from banks and non-bank lenders, 12 from trade
associations, three from lender service providers, two from law firms,
and three from private citizens. SBA received comments from 51
commenters pertaining only to changes to the 7(a) Loan Program, the
Microloan Program, and the 504 Loan Program (13 CFR part 120), and
comments from three commenters pertaining only to changes in the SBG
Program (13 CFR part 115).
The majority of the commenters supported the proposed changes, with
some commenters recommending minor modifications. SBA addresses the
comments in detail within the appropriate Section-by-Section analysis
below.
III. Section-by-Section Analysis of Comments and Changes
A. Intermediary Lending Pilot Program
Section 109.400 Eligible Small Business Concerns. Revisions to the
ILP Program regulations were added to this final rule to conform the
program to changes being made to the other Business Loan Programs.
Although no new ILP intermediaries are authorized, there are currently
intermediaries with outstanding revolving funds for eligible small
businesses. Therefore, the ILP Program is affected by the rule changes.
SBA is removing Sec. 109.400(b)(12) to align with the removal of Sec.
120.110(l), which stated that consumer and marketing cooperatives were
not eligible to participate in the Business Loan Programs. While SBA
did not originally propose any changes to this section, the removal is
appropriate to align requirements consistently across SBA programs.
Section 109.510 On-site and off-site reviews. To align this section
with the removal of the terms ``on-site'' and ``off-site'' from 13 CFR
part 120, SBA is removing these terms from 13 CFR part 109.
B. Surety Bond Guarantee Program
Section 115.19 Denial of liability. In Sec. Sec. 115.19(c)(1),
(d)(2) and (e)(2), SBA proposed modifying the threshold amount for
determining when an increase in the Contract or bond amounts may result
in a denial of liability from ``25% or $100,000, whichever is less'' to
simply ``25%.'' One commenter noted that, under paragraph (c)(1),
grounds for denial include when the Surety has committed a material
breach of the terms or conditions of the Prior Approval or Preferred
Surety Bond (PSB) Agreements, and a material breach is considered to
have occurred if ``[s]uch breach . . . causes an increase in the
Contract amount or in the bond amount of at least 25% or $100,000,
whichever is less.'' Similarly, under paragraph (d), grounds for denial
include when the Surety has committed a substantial violation of SBA
regulations, and such violation occurs when a violation ``causes an
increase in the bond amount of at least 25% or 100,000, whichever is
less in the aggregate . . .'' The commenter stated that they could not
contemplate a scenario where a breach or violation actually causes the
contract or bond amounts to increase. However, the intent of the
regulation is to make this connection between the breach or violation
and an increase in the contract or bond amount, and it is appropriate
as written. The commenter also suggested that the rule be clarified to
state that the base amount to which the 25% is being applied is the
``original contract amount.'' SBA agrees with this suggestion and is
revising the rule accordingly.
In addition, for the reasons discussed in section 115.32 below, SBA
is revising the rule to retain a dollar threshold, but to increase it
from $100,000 to $500,000.
Section 115.22 Quarterly Contract Completion Report. As proposed,
this
[[Page 39492]]
new section would require participating Sureties to submit Contract
Completion Reports within 45 days of the end of each quarter,
identifying completed contracts, contract amount changes, and any
related fees due. Two commenters expressed concern this may be an
administrative burden limiting Sureties' program participation. The
third commenter recommended that this provision not be incorporated due
to the increased administrative burden of reporting this information to
SBA within 45 days.
SBA considered these comments, but has decided not to accept the
recommendation. As SBA stated in the preamble to the proposed rule (81
FR 52597), SBA currently does not receive a final accounting of fees
due and paid by the Surety and Principal on contracts that are
successfully completed and, consequently, SBA is unable to ensure that
fees due the Government as a result of an increase in the contract
amount are paid in a timely manner on contracts that do not default.
This report will assist SBA in ensuring that fees due for increases on
successfully completed contracts are accurately calculated and paid
timely. SBA is amending this section as proposed.
Section 115.30 Submission of Surety's guarantee application. SBA
proposed to amend paragraph (d)(2)(i) of this section to increase the
Quick Bond eligible contract limit from $250,000 to $400,000. Two
commenters support this change to provide greater bonding opportunities
for small contractors. SBA is amending this section as proposed.
Section 115.32 Fees and Premiums. In the proposed rule, SBA
proposed to revise Sec. 115.32(d)(1) to modify the threshold amount
for determining when an increase in the Contract or bond amounts would
require a Prior Approval Surety to notify SBA, or obtain SBA's prior
written approval, from ``25% or $100,000, whichever is less'' to
``25%.'' SBA explained that it was proposing the change to better align
SBA requirements with the prevailing practice in the surety industry--
which now allows increases to the Contract and bond amounts without
prior notification to the Surety--while managing the increased bond
liability to the Government.
Three commenters generally expressed support for this provision and
indicated that, with the increase in the maximum contract amount from
$2 million to $6.5 million (and to $10 million for certain Federal
contracts), the $100,000 threshold was too low and unduly burdensome.
However, two of the commenters also expressed concern that smaller
contracts would be negatively impacted by a threshold based only on
percentage. These comments have caused SBA to reconsider the effects of
totally removing the dollar threshold. For example, with no dollar
threshold, a $5 million contract could be increased by $1 million
without the Prior Approval Surety notifying SBA or requesting, when
required, SBA's prior approval. To minimize the risks to the Agency
that would be posed by such a large increase, the Surety should be
required to notify SBA or, when required, seek SBA's prior approval.
Thus, upon reconsidering this issue, SBA has decided to retain a dollar
threshold, but in the interests of striking a balance between the risks
to the Agency and minimizing any burden on Sureties, the rule is being
revised to increase the dollar threshold from $100,000 to $500,000.
In addition, as discussed above for Sec. 115.19, SBA is accepting
and incorporating the recommendation to add clarifying language in the
final rule to read ``25% of the original contract amount''.
Section 115.60 Selection and admission of PSB Sureties. SBA
proposed that a Surety, for the initial nine months following admission
to the PSB Program, must obtain SBA's prior written approval before
executing a bond greater than $2 million. One commenter requested that
SBA clarify that this change does not apply to Sureties that
participate in the PSB Program prior to the effective date of this
final rule. SBA confirms that this change applies only to Sureties that
are admitted to the PSB Program after the effective date of the final
rule.
Another commenter suggested that this requirement may discourage
applications from Sureties for acceptance into the PSB Program. With
PSB Sureties executing SBA-guaranteed bonds without SBA's prior
approval, SBA believes that it is in the taxpayers' and the Agency's
best interests to require newer Sureties to demonstrate an
understanding of the program before being allowed to issue bonds larger
than $2 million without SBA's oversight. SBA is amending this section
as proposed.
Section 115.67 Changes in Contract or bond amount. In the proposed
rule, SBA proposed to change the threshold for when a PSB Surety must
remit additional fees due as a result of increases to the Contract or
bond amount from ``25% of the contract or bond amount or $100,000,
whichever is less'' to ``25%.'' As discussed above, two commenters
supported this change but expressed concern that this could negatively
impact smaller contracts. For the reasons discussed above for section
115.32, and because the same thresholds should apply to when PSB
Sureties are required to remit the additional fees owed, the rule is
being revised to retain and increase the dollar threshold from $100,000
to $500,000. The rule is also being revised to add clarifying language
that the increases will be based on the original contract amount.
Section 115.68 Guarantee percentage. In the proposed rule, SBA
proposed to revise this section to provide that SBA will reimburse a
PSB Surety in the same percentages and under the same terms as set
forth in Sec. 115.31, as authorized by Sec. 874 of Title VIII of
Division A of the National Defense Authorization Act, 2016, Public Law
114-92, 129 Stat. 726. All commenters supported this revision and this
provision is adopted as proposed.
C. 7(a) Loan, 504 Loan, and Microloan Programs
Section 120.110 What businesses are ineligible for SBA business
loans?
As proposed, SBA is removing consumer and marketing cooperatives
from the ineligible types of businesses identified in this section and
is reserving paragraph (l). SBA received support for the proposed
change from 22 commenters. With respect to the comments received, 18
commenters requested the removal of the requirement that at least one
individual or entity provide an unlimited guaranty for a loan made to a
consumer or marketing cooperative, and instead permit the use of a loan
guarantee pool funded by cooperative enterprises. Commenters suggested
that the ownership for many cooperatives consists of multiple members,
and that obtaining personal guaranties from multiple members can be
overly burdensome and should not apply to cooperatives. Currently, SBA
allows for an entity to provide the required loan guaranty in lieu of a
personal guaranty from an individual. SBA is not removing the guaranty
requirements for cooperatives at this time due to the inequity it would
create for all other classes of loan applicants where the unlimited
guaranty of an individual or entity is required. The rules governing
guaranties will continue to apply to cooperatives. SBA is amending this
section as proposed.
Section 120.111 What conditions must an Eligible Passive Company
satisfy?
SBA is amending this regulation as proposed with some modifications
as discussed below. The amended regulation will permit SBA loan
[[Page 39493]]
proceeds to be used to finance a change of ownership between existing
owners of the Eligible Passive Company (EPC). SBA does not intend for
this regulation to be used to finance a change of ownership in an EPC
that has only been in existence for a limited period of time. This
regulatory change is intended to assist with the preservation of a
business that might otherwise cease operations due to the departure of
an owner, as opposed to simply facilitating the withdrawal of capital
out of the business. SBA will include in Standard Operating Procedure
(SOP) 50 10 further guidance on when an EPC may use loan proceeds to
finance a change of ownership between existing owners.
In the 504 Loan Program, the amended regulation will permit loan
proceeds to be used to finance a change of ownership in the EPC when
the asset(s) of the EPC are limited to real estate and/or other
eligible long-term fixed assets that the EPC leases to one or more
Operating Companies (``OC'') for conducting the OC's business. SBA
recognizes that an EPC's balance sheet may include limited assets in
addition to the real estate or other eligible long-term fixed assets,
such as capital replacement reserves or escrow accounts for taxes and/
or insurance (such assets are referred to in this discussion as
``ineligible assets''). In such case, 504 loan proceeds may be used to
finance a change of ownership between existing owners of the EPC as
long as (1) the ineligible assets are directly related to the real
estate or other eligible long-term fixed assets, (2) the amount
attributable to such ineligible assets is de minimis, and (3) the
ineligible assets are excluded from the Project financing. Further
guidance for the 504 Loan Program will be incorporated into SOP 50 10.
SBA received 15 comments in support of this change with no
objection. Nine additional commenters supported this change with minor
modification and suggested language revisions to the introductory
paragraph to clarify what purpose loan proceeds may be used for when an
OC is a co-borrower with the EPC. One commenter suggested changing the
term ``Lender'' to ``SBA Lender'' as it is a defined term that includes
both a 7(a) Lender and CDC in this section. The term ``lender'' as used
in paragraph (a)(3) of this section includes Third Party Lenders in 504
Loan projects, so it is not appropriate to use ``SBA Lender.'' However,
the term ``lender'' as used in paragraph (a)(6) is directed to both a
7(a) Lender and a CDC; therefore, SBA is accepting this recommendation
for paragraph (a)(6) of this section, changing the term ``lender'' to
read ``SBA Lender.''
Eight commenters also suggested revised language that they believe
would clarify the Direct Final Rule that took effect on May 17, 2012
(77 FR 19531, April 2, 2012). That revision provided that in an EPC/OC
structure, when the OC is a co[hyphen]borrower the Agency would allow
loan proceeds to be used for working capital (as was already allowed)
as well as for ``the purchase of other assets for use by the OC,
including the purchase of stock or intangible assets (such as
trademarks, copyrights, intellectual property or goodwill).'' An
industry trade association, suggested in its comments that when the
Direct Final Rule was published in 2012, SBA inadvertently omitted
language from the introductory paragraph of Sec. 120.111, and the
omission of the language led to incorrect interpretations of the
revised regulation. SBA considers this particular comment to be a
logical outgrowth of reviewing Sec. 120.111 and within the context of
the proposed rule to clarify and correct areas of the regulations that
are out of date or inconsistent with the current procedures. While not
included in the proposed rule, based on the comments received, SBA is
adding language to the introductory paragraph to clarify the eligible
uses of loan proceeds when the OC is a co-borrower on the loan to the
EPC.
SBA is amending Sec. 120.111(a)(3) to clarify that rent or lease
payments made by the OC to the EPC cannot exceed the amount necessary
to make the loan payment to the lender, and additional amounts to cover
the EPC's direct expenses of holding the property, such as maintenance,
insurance and property taxes. SBA received 32 comments concerning this
proposed change, 12 in support of and 20 objecting to the proposed
change to this paragraph. Commenters recommended the proposed language
be amended to specify that the rents charged by the EPC to the OC could
include a reserve to cover capital asset replacement such as heating,
ventilation, and air conditioning (HVAC). One commenter stated that the
proposed regulation refers only to the ``the loan payment to the
lender'' and does not take into consideration that in a 504 Loan, the
EPC/OC rent includes payments to the CDC, the Third Party Lender and
any junior financing such as a borrowed equity loan or other financing
outside of the 504 Project. Payments to the Third Party Lender
participating in a 504 project are included in the ``loan payment to
the lender'' and SBA determined that no additional clarification for
this issue is necessary.
Several commenters who objected to the proposed change recommended
that SBA adopt Internal Revenue Service (IRS) standards for holding
companies and not require additional regulatory requirements. IRS rules
generally do not consider or address SBA Loan Program Requirements such
as the prohibition of financing for investors or landlords. While SBA
permits eligible EPCs to hold certain assets financed for the benefit
of the OC, it is not the intent of SBA to permit the EPC to profit from
its relationship with the OC.
It is SBA's positon that routine maintenance costs, Project debt
payments, and repairs are already included in the permissible direct
expenses of holding the property and as such would be permissible under
the regulation. Additional guidance on this issue will be placed in SOP
50 10.
SBA also proposed to add language to Sec. 120.111(a)(6) to provide
the Agency may, in its discretion and in consultation with the SBA
Lender, require the guaranty of individuals or entities with less than
20 percent ownership of the EPC or the OC when circumstances warrant.
In 2010, the Small Business Jobs Act of 2010, Public Law 111-240, 124
Stat. 2504 (September 27, 2010) (the ``2010 Jobs Act'') increased the
maximum loan size for 7(a) and 504 Loans. SBA now receives more loan
requests from applicants with multiple owners who may hold less than 20
percent of the company regardless of managerial responsibilities,
corporate titles or ownership interest, if any.
SBA received 24 comments on this proposed change: 18 in full
support, five in support with modification, and one objecting to the
proposed change. Recommended modifications to this paragraph included
revising the language to provide greater detail as to when individuals
could be required to guarantee the loan, and to provide authority to
both SBA and delegated lenders to determine when there are sufficient
reasons to do so. One commenter expressed concern that the proposed
change would be ``all encompassing'' and may result in unintended
consequences.
It is prudent for SBA to require a lender to obtain a guaranty when
one or more individuals or entities have the authority and
responsibility to manage operations regardless of their ownership
interest in the applicant business. SBA will generally not require
individuals or entities with less than 20 percent ownership of the
applicant business to guarantee the loan when the lender
[[Page 39494]]
obtains a guaranty from those with 20 percent or more ownership
interest. SBA considered and accepts the recommendation to include the
authority for delegated lenders to obtain full or limited guaranties
from appropriate individuals or entities regardless of their ownership
interest in the EPC or the OC, and is modifying the rule to state that
SBA and, for loans processed under a SBA Lender's delegated authority,
the SBA Lender, may determine when credit or other reasons make it
necessary to obtain a full or limited guaranty from appropriate
individuals or entities. SBA will provide additional guidance on the
guaranty requirements in SBA SOP 50 10. In addition, as stated above,
SBA is modifying Sec. 120.111(a)(6) to replace the term ``Lender''
with ``SBA Lender.''
Section 120.130 Restrictions on uses of proceeds. SBA proposed
moving Sec. 120.160(d) to Sec. 120.130 as new paragraph (e) and
redesignating Sec. 120.130 (e) and (f) as paragraphs (f) and (g),
respectively. The new paragraph (e) includes the text currently found
in Sec. 120.160 Loan Conditions, in paragraph (d), Taxes, which
prohibits the use of proceeds for payment of past-due Federal or state
payroll taxes. This requirement is a restriction, not a loan condition,
and is appropriately moved to Sec. 120.130(e). SBA also proposed
revising what will become paragraph (g) to remove an inaccurate
reference to Sec. ``120.203'' and replacing it with Sec. ``120.202.''
Section 120.203 cited in this paragraph was removed in 1996. SBA
received eight comments, one in support and seven requesting a
modification. The majority of commenters asked SBA to consider
expanding the prohibited use of proceeds to include other similar
taxes, such as sales taxes, that may be required to be collected by the
small business in trust on behalf of a Federal, state or local
government entity. SBA has considered and is accepting the
recommendation to include the references to other local, state and
Federal taxes in the final rule.
Section 120.160 Loan conditions. SBA proposed adding the word
``generally'' to the last sentence of Sec. 120.160(a) to clarify that
SBA may require a personal guaranty of an individual or entity with
less than five percent ownership in the applicant business when the
circumstances warrant. SBA received 24 comments concerning this
proposed change: 22 in support, with 11 of the supporters recommending
modification. Only two commenters expressed concerns, one that wanted
to require no guaranties from non-owners, while another observed that
this requirement is not currently included in the regulation.
Recommendation was also made to use the defined term ``SBA Lender'' as
it is appropriate for both the 7(a) and 504 Loan Programs. Finally, one
commenter expressed concern that the proposed change was ``all
encompassing'' and may result in unintended consequences. SBA agrees
with the recommendation that the term ``SBA Lender'' should be used
since the regulation includes both 7(a) lenders and CDCs, and will
replace ``Participating Lender'' with ``SBA Lender.'' As stated in the
discussion of guaranties for EPCs and OCs in Sec. 120.111 above, the
2010 Jobs Act increased the maximum loan size for 7(a) and 504 loans.
Small businesses needing larger loans are more likely to have complex
ownership structures and multiple owners, where each owner may hold
less than five percent of the company regardless of managerial
responsibilities or corporate titles. The current regulation language
restricts SBA from requiring personal guaranties from individuals with
less than five percent ownership under any circumstance.
SBA deems it prudent to maintain discretion for SBA, in
consultation with the Lender, to require guaranties from individuals or
entities with less than 20% ownership of the applicant business when
they are critical to the extension of credit. The removal of the
reference to 5% as the strict measure for required guaranties will
allow SBA to obtain full or limited guaranties from appropriate
individuals or entities regardless of their ownership interest in the
applicant business, if any, when deemed necessary. In addition, SBA
considered and is accepting the recommendation to provide this
discretion to delegated SBA Lenders as well and, therefore, is
modifying the rule to state that SBA and, for loans processed under an
SBA Lender's delegated authority, the SBA Lender, may determine when
credit or other reasons make it necessary to obtain a full or limited
guaranty from appropriate individuals or entities regardless of their
ownership interest, if any, in the applicant business. SBA will provide
additional guidance on the guaranty requirements in the appropriate SBA
SOP.
Twenty commenters recommended the proposed changes to the personal
guaranty rules be provided in SOPs, where exceptions can be made. While
SBA provides additional detail on guaranty requirements in its SOPs,
program-wide rules are appropriately included in this regulation. SBA
is amending this section as proposed with the modifications discussed
above.
Section 120.194 Use of computer forms. SBA is removing Sec.
120.194 in its entirety, and reserving this section for future use.
Technology has rendered this regulation unnecessary. SBA received nine
comments on this proposed change: Eight in support of the proposed
change and one objection. The objection was based on a misconception
that SBA Lenders will no longer be able to submit loan packages using
their own or commercially available lending software. SBA continues to
work with participants and their software sources to expand electronic
access in all program applications. SBA is removing this section as
proposed.
Section 120.214 What conditions apply for variable interest rates?
SBA is not proceeding with the proposed revisions to Sec. 120.214
regarding when the allowable base rate is determined and when
adjustments in the variable interest rate will be permitted. SBA
received 10 comments, generally in support of a change, with some
comments indicating that the guidance did not fully address the issues
regarding the timing of rate changes and base rates. After reviewing
current market activity, the impact of rate adjustments on the small
business borrower, and the potential need to further simplify the
guidance, SBA will conduct a more thorough discussion with internal and
external stakeholders on how best to manage interest rate changes in
the 7(a) Loan Program. SBA will not make changes to this section at
this time.
Section 120.220 Fees that Lender pays SBA. As set forth in section
7(a)(31) of the Small Business Act (15 U.S.C. 636(a)(31)) (``the
Act''), SBA is adding a new paragraph (a)(3) to Sec. 120.220 to codify
the statutory waiver of the up-front guaranty fee for SBA Express loans
made to businesses owned and controlled by a veteran or spouse of a
veteran (as defined in the Act) for fiscal years when the subsidy rate
for the 7(a) program is zero. SBA received eight comments regarding the
proposed changes. Of those, seven commenters recommended that SBA
specifically use the term ``SBA Express'' to identify loans delivered
under section 7(a)(31) of the Act. The conditions a business must meet
to qualify for this fee waiver will be explained in SBA Loan Program
Requirements.
In Sec. 120.220(b), SBA is amending the regulation to advise
Lenders to pay the guaranty fee electronically and revising the
timeframe within which a Lender must pay the guaranty fee to SBA for
loans with a maturity of 12 months or
[[Page 39495]]
less (``short-term loans''). SBA is revising the timing of payment of
the fee on a short-term loan from the ``time of application'' to
``within 10 business days of SBA's approval of the loan.'' The current
requirements were implemented when Lenders paid fees using checks.
Currently, fees are paid electronically through www.pay.gov, and
requiring fee payments with the application on short-term loans can
delay application processing and turn-around times. SBA received eight
comments on this proposed change, all in support of the change. SBA is
also amending paragraph (b) of this section to permit a Lender to be
reimbursed by the Borrower for the guaranty fee on a short-term loan
only after the Lender pays the fee to SBA. SBA will not permit Lenders
to collect the guaranty fee from the Borrower prior to paying SBA. The
final rule is incorporating both the 10 day fee payment guidance and
the timeline for collection of the fee from the Borrower.
In Sec. 120.220(c), SBA also proposed and is adopting the rule
change removing the first two sentences which state when SBA will
refund the guaranty fee paid on a short-term loan. The additional 10
day time period post-loan approval for payment of the fee negates the
need for refunds. SBA received eight comments supporting the proposed
change in the timing of payment to SBA of guarantee fees on loans of 12
months or less, but the commenters asked that SBA provide a provision
for refund of the guaranty fee of an approved loan if the Lender had
not made any disbursements. The guaranty fee is limited to one quarter
of one percent of the guaranteed portion of the short-term loan and is
only refundable if a short-term loan application is withdrawn by the
Lender prior to approval by SBA, if SBA declines to guarantee the loan,
or if SBA approves the loan but substantially changes the terms and
SBA's modified terms are unacceptable to the Lender. SBA deems the fee
earned for short-term loans once the SBA loan number is issued. SBA is
not adopting the suggestion regarding refunds on short-term loans.
Section 120.221 Fees which the Lender may collect from a loan
applicant.
SBA is adopting, as proposed, the addition of an introductory
paragraph stating that, unless otherwise permitted by SBA Loan Program
Requirements (e.g., the guaranty fee under Sec. 120.220), the fees
listed in Sec. 120.221 are the only fees a Lender is permitted to
charge and collect from an Applicant or Borrower. SBA received eight
comments on this proposed change, all supporting the improvement in
clarity. SBA also proposed to remove the contents of Sec. 120.221(e),
as it is not a fee a Lender may collect from a loan applicant in
accordance with the stated purpose of Sec. 120.221. SBA will insert in
its place language which permits Lenders to collect fees for legal
services. This change combines and provides clear guidance on the only
fees a Lender is permitted to charge and collect from an Applicant or
Borrower. Eight comments were received that suggested the language be
revised to specifically include legal fees provided by ``either outside
or in-house counsel.'' SBA has determined that the proposed language
was somewhat cumbersome and revised the language slightly to
incorporate SBA permits the Lender to charge the Borrower for legal
services rendered on an hourly basis. SBA is revising the paragraph (e)
to read ``Legal services. Lender may charge the Borrower for legal
services rendered on an hourly basis.''
Section 120.222 Fees which the Lender or Associate may not collect
from the Borrower or share with third parties. As proposed, SBA is
retitling Sec. 120.222 from ``Fees which the Lender or Associate may
not collect from the Borrower or share with third parties'' to
``Prohibition on sharing premiums for secondary market sales.'' SBA is
also removing the contents of paragraphs (a), (b), (c), (d), and (e),
and inserting the following language: ``The Lender or its Associate may
not share any premium received from the sale of an SBA guaranteed loan
in the secondary market with a Service Provider, packager, or other
loan-referral source.'' All eight comments received indicated support
for this proposed change. This proposed change completes the
consolidation and re-organization of Sec. Sec. 120.221 and 120.222, by
clearly identifying the only fees that a Lender may charge and collect
from an applicant. Unless otherwise permitted by SBA Loan Program
Requirements, any fee not identified in Sec. 120.221 is prohibited.
SBA is retaining the prohibition on the sharing of secondary market
fees in Sec. 120.222 for consistency with 13 CFR 103.5(c), which
prohibits a Lender from sharing any secondary market premium with a
lender service provider. SBA is amending this section as proposed.
Section 120.394 What are the eligible uses of proceeds? For the
Builders Loan Program, SBA proposed to increase the regulatory
limitation on use of proceeds for land acquisition from 20 percent to
33 percent. SBA received eight comments regarding this proposed rule
change, all in support. SBA is amending this section as proposed.
Section 120.400 Loan Guarantee Agreements. Section 120.400 includes
a cross reference to Sec. Sec. 120.441(b) and 120.451(d). SBA proposed
to delete these sections and is deleting both in this final rule. In
addition, SBA proposed revisions to Sec. 120.440, which it is adopting
as proposed with a minor modification. Accordingly, SBA is revising the
cross reference in Sec. 120.400 to read ``See also 120.440(c)
concerning Supplemental Guaranty Agreements.'' Although this revision
was not included in the proposed rule, SBA is revising Sec. 120.400 to
correct this inadvertent omission from the proposed rule.
Multiple Sections--On-Site/Off-Site Reviews for 7(a) Lenders, CDCs
and Microloan Intermediaries (``Intermediaries''). Due to SBA's
improved electronic methods, virtual reviews, such as Analytical
Reviews, may cover much of what was previously performed in the scope
of ``on-site'' reviews, diminishing the distinction between ``off-
site'' and ``on-site'' reviews and allowing for more cost-effective
reviews. Therefore, SBA proposed to remove all references to ``on-
site'' reviews in Sec. Sec. 120.410(a)(2), 120.424(b), 120.433(b),
120.434(c), 120.630(a)(5), 120.710(e)(1), 120.812(c), 120.816(c),
120.839, 120.841(c), 120.1050, 120.1051, 120.1070 and 120.1400(c)(4).
SBA will retain the term ``review/examination assessments'' in these
regulations. SBA also proposed to replace references to ``off-site''
reviews and monitoring with ``monitoring'' in Sec. Sec. 120.1025 and
120.1051(a). SBA received eight comments on the proposed changes, with
no objections.
SBA is amending the specified sections to remove the terms ``on-
site'' and ``off-site'' as proposed.
SBA proposed and is adopting replacement of the term ``Good
Standing'' with ``Satisfactory'' as it relates to a Lender's status
with its other Federal regulators in Sec. Sec. 120.410(e),
120.630(a)(4), and 120.1703(a)(4). SBA will determine if a Lender is
considered ``Satisfactory'' by its other regulators based on, for
example, information in published orders/agreements and call reports.
Eight commenters provided no objection to the proposed changes.
Undesignated Center Heading--The Certified Lenders Program. SBA is
adopting the proposed rule change to the heading immediately following
Sec. 120.435 in Subpart D--Lenders as proposed. SBA is removing
``Certified Lenders Program (CLP)'' and inserting in its place
``Delegated Authority Criteria.'' There were eight comments
[[Page 39496]]
received on this change with no objections.
Section 120.440 The Certified Lenders Program. SBA is adopting the
proposed rule change to remove the heading and remove Sec. Sec.
120.440 and 120.441 as proposed. Implementation of more efficient
technology-based processing, closing, servicing, and liquidation render
this delivery method unnecessary and obsolete. SBA will remove the
existing CLP language and insert guidance for Delegated Authority
Criteria (see addition of Delegated Authority Criteria below). SBA
received eight comments on this proposed change with no objections.
New Section 120.440 How does a 7(a) Lender obtain delegated
authority? SBA is adopting the proposed rule change adding the criteria
for initial approval or renewal of delegated authority in this section
as proposed with a minor modification to the heading as discussed
below. As stated in the preamble to the Notice of Proposed Rulemaking,
these criteria are essentially identical to the criteria currently
included in SBA's SOP 50 10 5(I), Subpart A for the 7(a) Loan Program
delegated authorities (e.g., PLP (including PLP-EWCP), SBA Express and
Export Express Programs). In applying these criteria when processing
requests for PLP-EWCP authority, SBA will continue to also consider
experience in providing trade finance to exporters and active
participation in SBA's EWCP program. In addition, for lenders
participating in the Delegated Authority Lender Program of the Export-
Import Bank (or any successor Program), such lenders are eligible to
participate in the PLP-EWCP Program, pursuant to 15 U.S.C.
636(a)(2)(C). SBA received a detailed comment and recommendations from
a trade association as well as seven other comments supporting the
trade association's position. The trade association commented they have
no objection to the inclusion in regulations of the criteria for a
Lender to obtain delegated authority and noted the listed criteria is
similar to that currently provided in other SBA Loan Program
Requirements. However, the trade association objected to paragraph (b)
of the proposed section, which states delegated authority decisions are
final. The trade association strongly recommended SBA provide a
mechanism by which a Lender, if it is denied delegated authority, could
provide SBA with additional information to overcome and
administratively appeal such decision. SBA reviewed the suggested
modification and determined that an additional appeal of SBA's decision
to deny a Lender delegated authority is not necessary because, if
delegated authority is declined, the Lender will still be able to
process loans on a non-delegated basis and, when the Lender has
overcome the reasons for the decline, it may re-apply. SBA is amending
the regulation as proposed with a slight modification in the heading to
clarify this section applies to 7(a) Lenders.
Section 120.441 How does a Lender become a CLP Lender? SBA is
removing and reserving Sec. 120.441 as proposed. SBA received eight
comments, all in support of the proposed change.
Section 120.451 How does a Lender become a PLP Lender? SBA is
removing and reserving Sec. 120.451 as proposed. The process for
lenders to obtain delegated authority for the 7(a) program, which
includes Preferred Lender Program authority, will be set forth in Sec.
120.440 pursuant to this final rule. There is no longer a need for the
specific regulation at Sec. [thinsp]120.451. SBA received eight
comments, all of which provided no objection to the proposed change.
Section 120.524 When is SBA released from liability on its
guarantee? In this regulation, SBA proposed to clarify its rights to
collect monies paid on a guaranty from which the Agency determines it
has been released of liability. This includes judicial remedies and the
right to offset funds due the Lender for the guaranty purchase of
another loan. SBA's right to seek these remedies arises under contract
law as interpreted by the courts. SBA received eight comments on this
proposed change, all of which supported the rights provided to SBA
under the proposed language. The eight commenters supported the
proposed language; however, they recommended the language be amended to
state such remedies will only be undertaken if all other attempts to
collect from the lender have failed. Commenters also noted SBA is
removing the specific language ``responsible for those events'' in
paragraph (b) and requested an explanation of this specific change.
The Agency's ability to recover on a loan guaranty is not limited
to the actions of the current holder of the Note. For example, when a
Lender acquires a guaranteed loan from another lender, the acquiring
lender is ultimately responsible for any action resulting in a loss on
the loan, whether the loss is the result of its actions or inaction, or
the actions or inaction of the original lender. SBA is amending this
section as proposed.
Section 120.660 Suspension or revocation. SBA is adopting the
proposed rule change in Sec. 120.660(a) to provide that decisions
regarding a temporary suspension or revocation of a Lender from SBA's
Secondary Market under this regulation be made jointly by the Director,
Office of Financial Assistance (D/FA) and the Director, Office of
Credit Risk Management (D/OCRM). SBA received comments from eight
commenters regarding the provisions in this proposed regulation; all
registered no objection to the change. In addition, SBA is adopting as
proposed a limit of no more than 120 calendar days for temporary
suspensions under this regulation, and no more than two years under
this regulation for temporary revocations of the privilege of a Lender,
broker, dealer or Registered Holder to sell, purchase, broker or deal
in loans or Certificates in SBA's Secondary Market. All eight
commenters registered support for the timeframes in the proposed rule.
In Sec. 120.660(a)(1)(ii), SBA is removing references to SBA Form
1085 from the current regulation, as proposed. SBA Form 1085 is no
longer in use in the 7(a) Loan Program. SBA received only one comment
and it was in support of the change. In Sec. 120.660(a)(3), SBA is
adding additional reasons under which SBA may temporarily suspend or
revoke a Lender's privilege to participate in SBA's Secondary Market.
As proposed, SBA may temporarily suspend or revoke a Lender from
participation in SBA's Secondary Market when (1) a Lender receives from
its primary Federal or state regulator (including SBA): (a) A cease and
desist order; (b) a consent agreement affecting capital or commercial
lending issues; or (c) a supervisory action citing unsafe or unsound
banking practices or other items of concern to SBA that may create
potential risk to SBA through loan sales; or (2) a Lender receives a
going concern opinion issued by its auditor. SBA received eight
comments all of which supported the proposed change with some
modifications. The suggested modifications centered on better defining
the phrase, ``other items of concern to SBA . . .'' and the
practicality of providing SBA with notice within five business days
from the issuance of the regulatory action or going concern opinion.
SBA wants to avoid situations in which current supervisory actions from
a Federal or state regulator are renamed, or new actions involving
unsafe or unsound lending practices are created and are disclosed, but
are not expressly listed in the SBA regulation.
[[Page 39497]]
SBA considered the comments provided. SBA has modified the text to
provide a more complete explanation of supervisory actions which are
subsequently renamed or have yet to be defined. This ensures that the
grounds for temporary suspension or termination from SBA's Secondary
Market are not limited by the prevailing terminology used by Federal or
state regulators. Regarding the practicality of a Lender providing SBA
notice, commenters raised the issue of disclosure of non-public
supervisory actions and the date by which the required disclosure of
public supervisory actions should be measured. At this time, Lenders
will be required to notify SBA only for public actions.
SBA also modified the final rule to define the required
notification date to SBA as five business days (or as soon as
practicable thereafter) from the date that the regulatory action is
placed into the public domain. This will establish a verifiable
benchmark for when notice from the Lender is due to SBA. Note, SBA does
not intend to require a Lender to disclose a non-public supervisory
action unless SBA notifies the Lender that SBA has either an agreement
with or consent from the regulator issuing the action. Lenders
receiving a going concern opinion will have five business days (or as
soon as practicable thereafter) from the date of the auditor's letter
indicating a going concern opinion to provide written notice to SBA.
SBA also proposed to add a new paragraph (d) to this section to
provide for early termination of a temporary suspension or revocation
at the joint discretion of the D/FA and the D/OCRM, if warranted for
good cause. SBA received eight comments regarding this proposed change,
all in support, and SBA is adding the paragraph as proposed.
Section 120.823 CDC Board of Directors. SBA proposed to revise
Sec. 120.823(c)(5) to eliminate the language that prevents a CDC Board
member from serving on the board of another entity, except for civic or
charitable organizations not involved in financial services or economic
development. SBA received 15 comments in support of this proposed
change.
SBA also proposed in Sec. 120.823(d)(4)(ii)(C) to clarify that
individuals serving on the Loan Committee of a CDC do not have to be
members of the CDC or the CDC's Board of Directors. SBA received 15
comments regarding this proposed change, all in support. Twelve of the
commenters recommended Sec. 120.823(d)(4)(ii)(A) also be revised for
consistency with the proposed revision in Sec. 120.823(d)(4)(ii)(C).
SBA considered these comments and agrees that individuals who are not
CDC members, shareholders, or Board members may be appointed by the
Board of Directors to serve on the Loan Committee provided that the
individual has background and expertise in financial risk management,
commercial lending, or legal issues relating to commercial lending and
is not associated with another CDC.
In order to ensure consistency in this section on Loan Committees,
SBA will revise paragraphs (d)(4)(ii)(A), (d)(4)(ii)(B), (d)(4)(ii)(C)
and (d)(4)(ii)(E) references to members of the Loan Committee. SBA will
revise the terms ``member'' and ``committee member'' in this section to
read ``Loan Committee member''.
SBA also received one comment requesting reconsideration of SBA's
general prohibition in Sec. 120.820 against a CDC having an
affiliation with a 7(a) Lender now that CDCs may offer 7(a) loans under
the Community Advantage Pilot Program. Community Advantage is currently
a pilot program--for which SBA has granted a regulatory waiver of the
affiliation prohibition. SBA is not considering changes to this general
prohibition at this time, and is adopting the changes to this section
as described above.
Section 120.839 Case-by-case application to make a 504 loan outside
of a CDC's Area of Operations. SBA proposed to replace the term
``District Offices'' in this section with ``504 loan processing
center'' to reflect the SBA office that processes 504 loan
applications. SBA received 13 comments supporting this change. One of
the 13 commenters expressed concern with removing the District Office
from the decision process. The commenter noted that a District Office
may have local insights on markets not available to the 504 loan
processing center. However, as explained in the preamble to the
proposed rule, SBA is making this change to reflect the SBA office that
processes 504 loan applications. Although SBA is not making any changes
to the rule as proposed, the 504 loan processing center may consider
input from the local District Office when making such a determination
to allow a CDC to make a loan outside of its Area of Operations.
Section 120.884 Ineligible costs for 504 loans. SBA is amending
this section to define heavy duty construction equipment in Sec.
120.884(e)(3) without reference to the IRS definition because the IRS
no longer publishes a definition for ``capital equipment.'' SBA is
adding the requirement that the equipment have a remaining useful life
of at least 10 years. SBA received one comment on this section which
supported the change, yet expressed concern about adding a useful life
requirement. In order to be consistent with the overall purpose of the
504 program, SBA will only permit the financing of construction
equipment if it is heavy duty construction equipment integral to the
business' operations with a remaining useful life of at least 10 years.
Section 120.1060 Confidentiality of Reports, Risk Ratings and
related Confidential Information. SBA proposed a limited expansion of
its definition in Sec. [thinsp]120.1060 of ``permitted parties'' to
include a party who demonstrates a legitimate need to know Review/Exam
Report information, Risk Rating, and Confidential Information for the
purpose of assisting in improving an SBA Lender's, Intermediary's or
Non-Lending Technical Assistance Provider's (NTAP's) SBA program
operations in conjunction with SBA's Lender Oversight Program and SBA's
portfolio management. This limited expansion of permitted parties may
include the lender's parent entity, directors, auditors and those
lender consultants under written contract specifically to assist the
Lender in addressing SBA Findings and Corrective Actions Required to
SBA's satisfaction. Consultants do not include Lender Service
Providers. The change codifies SBA's practice of approving disclosure
of Reports, Risk Rating, and Confidential Information for the expanded
group of permitted parties, obviating the need for case-by-case
approval and the use of a Confidentiality Agreement for these parties
going forward. SBA received eight comments in support of this proposed
change. Commenters suggested that it may also be appropriate for SBA to
consider allowing Lenders to share SBA reports and other oversight
information with their regulators in order to improve the overall
quality of the program. Generally, SBA manages information sharing with
other regulators on a case-by-case basis and in conjunction with
agency-to-agency information sharing agreements. If a Lender's other
regulator requests Sec. 120.1060 information, the Lender should refer
the regulator to SBA. SBA is adopting the change to this section as
proposed.
Section 120.1070 Lender oversight fees. SBA proposed to amend this
section[thinsp]to categorize the fee components as Examinations,
Reviews, Monitoring, and Other Lender Oversight Activities. The
proposed section also provided that SBA has discretion in how it
allocates
[[Page 39498]]
lender oversight costs to Lenders to allow contracting flexibility in
how SBA pays for this cost and the fair and efficient allocation of
costs to Lenders. The change specifies, consistent with SBA's current
practice and current contracts, that, in general, where the costs that
SBA incurs for the oversight activity are specific to a Lender, SBA
will charge that Lender for the actual costs. Where the costs SBA
incurs for the oversight activity are not sufficiently specific to a
particular Lender and a flat fee is paid to a vendor, SBA may charge a
Lender based on that Lender's portion of SBA guaranties in the
portfolio or segment of the portfolio that the activity covers. SBA
received nine comments regarding the proposed change. One commenter
suggested SBA change the use of the word ``Lender'' to ``SBA Lender,''
which is a defined term in the regulations. The term ``SBA Lender'' is
defined as 7(a) Lenders and CDCs in 13 CFR 120.10. This regulation only
applies to 7(a) Lenders in accordance with 15 U.S.C. 634(b)(14).
Therefore, SBA is not adopting the suggestion to use ``SBA Lender'' in
this regulation.
Another commenter, a trade association, joined by seven other
commenters, stated that, while they have no objection to the proposed
change, they have concerns that SBA has virtually no incentive to limit
the costs that it imposes on program participants for the review
function. The trade association expressed concern that increasing
oversight costs could, at some point, make program participation too
expensive for some lenders, thus limiting small business' access to
critically needed capital. The trade association recommended that SBA
continue to find ways to make the OCRM review function as
cost[hyphen]effective as possible for SBA and for program participants.
SBA disagrees that it has little incentive to limit the costs of
lender oversight. SBA is committed to developing and operating a robust
risk management program at the most efficient cost possible and to
reducing costs where possible. SBA will continue to minimize its
oversight costs and the fees it charges program participants through
competitive bidding processes, using fixed price contracts where
appropriate, contract monitoring, and efficiently coordinating the work
with its contractors.
In addition, one commenter requested that SBA publish its lender
oversight fees annually. SBA lender oversight fees do not always change
from year-to-year, so it may not be necessary to publish each fee every
year. However, generally, when a lender oversight fee changes, SBA
communicates the fees to all 7(a) Lenders via SBA notice. SBA is
adopting this section as proposed.
Section 120.1400 Grounds for enforcement actions--SBA Lenders. SBA
proposed to amend Sec. 120.1400(a) to provide that by making 7(a)
guaranteed loans or 504 loans after a certain date, SBA Supervised
Lenders (except Other Regulated Small Business Lending Companies
(SBLCs)) or CDCs, as applicable, consent to the appointment of a
receiver and such injunctive relief or other equitable relief as
appropriate, and waive in advance any defenses to such relief as sought
by SBA, in connection with an enforcement action.
There were responses from 27 commenters concerning the proposed
changes in this section. There were eight commenters in support of the
changes. However, there were some concerns that SBA continues to cite
SBA Form 750, Loan Guaranty Agreement (Deferred Participation), as the
document that Lenders should rely on as ``fully'' setting forth 7(a)
Loan Program Requirements, considering that the current version of the
SBA Form 750 in use is outdated and may not be reflective of current
policy and SBA Loan Program Requirements. There were eight commenters
who were concerned about the SBA's intention when imposing a prior
waiver provision--that is, whether the SBA Supervised Lender or CDC
would be waiving only its defenses against having SBA bring the matter
before the court, or whether it also would be waiving all of its
defenses with respect to all of the actions that SBA may be seeking to
enforce against the SBA Supervised Lender or CDC, and sought additional
clarification on this point.
There were 18 commenters who voiced objection to the proposed
language as overly broad and not necessary under the current
regulations. The objecting commenters stated that, while they agree SBA
has a right to regulate the 504 Loan Program, they believe that the
right of SBA to appoint an uncontested receiver for an SBA Supervised
Lender or CDC over-reaches the SBA's regulatory authority over these
entities. The objectors believe the language in the proposed rule is
unnecessarily broad in that it seeks to include a waiver of any and all
defenses an SBA Supervised Lender or CDC may validly raise to an
enforcement action by the SBA. Additionally, the commenters stated that
while SBA may be able to manage and service the SBA loan portfolio,
they believe SBA has no interest in managing and servicing the non-SBA
loans of a CDC or an SBA Supervised Lender that is a Non-Federally
Regulated Lender or managing the contracts CDCs may have with their
state, city, or other governmental organizations.
SBA considered the receivership comments concerning SBA Supervised
Lenders and CDCs, but determined that the proposed provisions that
allow SBA to seek receiverships by consent will provide the Agency
added flexibility in protecting and safeguarding the security and
integrity of these federally funded loan programs. SBA is conditioning
its guarantee of 7(a) loans made by SBA Supervised Lenders (except
Other Regulated SBLCs) and 504 debentures after a certain date on
consent to this relief in connection with an enforcement action because
the injury to SBA and its supervision and regulatory oversight of the
SBA Supervised Lender or CDC due to the SBA Supervised Lender's or
CDC's default under its agreement(s) with SBA would be irreparable and
the amount of damage would be difficult to ascertain, making this
relief necessary. Consent to receivership is not without precedent in
Federal agency practice and has been upheld by the courts as valid and
legally enforceable. SBA identified an example of such a case in the
proposed rule, U.S. v. Mountain Village Company, 424 F. Supp. 822 (D.
Mass. 1976). The consent to receivership does not mandate the
appointment of a receiver in connection with every enforcement action.
SBA will review the facts and circumstances of the enforcement action
when deciding whether or not to seek the appointment of a receiver and
in determining the scope of the receiver's duties and powers, including
whether the receiver's duties and powers will be limited to taking
possession of, servicing and/or selling or transferring the 7(a) or 504
loan portfolios.
After careful consideration of comments, SBA believes that it is in
the best interests of the taxpayers for SBA to have the added
flexibility of seeking receiverships, if necessary or appropriate, when
taking enforcement actions. However, in response to comments, SBA has
revised the language of the proposed rule to clarify that along with
the consent to the remedies in Sec. Sec. 120.1500(c)(3) or
120.1500(e)(3), the SBA Supervised Lender or CDC waives in advance any
right to contest the validity of the appointment of a receiver. SBA has
not adopted the proposed regulatory text providing for a waiver in
advance of any defenses to the relief sought by SBA.
Section 120.1500 Types of enforcement actions--SBA Lenders. SBA
proposed to revise the language permitting the Agency to initiate a
[[Page 39499]]
request for the appointment of a receiver of an SBA Supervised Lender
in Sec. 120.1500(c)(3) and proposed to add language permitting SBA to
initiate a request for the appointment of a receiver of a CDC in Sec.
120.1500(e)(3). After careful consideration of comments received, SBA
believes that it is in the best interests of the taxpayers for the
Agency to have the added flexibility of seeking receiverships, if
necessary or appropriate, when taking enforcement actions. SBA has
therefore determined that it will amend this section as proposed. There
were responses from 27 commenters concerning the proposed changes in
this section. There were 19 commenters who voiced objection to the
proposed language as overly broad and not necessary under the current
regulations. Again, the objecting commenters provided that, while they
agree SBA has a right to regulate its loan programs, they believe that
the right of SBA to appoint an uncontested receiver for a CDC over-
reaches the SBA's regulatory authority over these entities.
While the objectors did support the need for proper oversight and
supervision of SBA Supervised Lenders and CDCs, they also believe that
SBA Supervised Lenders and CDCs should be afforded their constitutional
right to notice and a hearing before being deprived of their property
rights and interests. SBA considered the constitutional issue of due
process/waiver of notice. Consent to receivership in favor of Federal
agencies--including without notice--has been upheld in Federal court as
valid, enforceable and meeting constitutional due process. SBA
identified an example of such a case in the proposed rule, U.S. v.
Mountain Village Company, supra.
As stated above, SBA considered the receivership comments
concerning SBA Supervised Lenders and CDCs, but determined that the
proposed provisions that allow SBA to seek receiverships by consent
will provide the Agency with added flexibility in protecting and
safeguarding the security and integrity of these federally funded loan
programs. SBA is conditioning its guarantee of 7(a) loans made by SBA
Supervised Lenders (except Other Regulated SBLCs) and 504 debentures
after a certain date on consent to this relief in connection with an
enforcement action because the injury to SBA and its supervision and
regulatory oversight of the SBA Supervised Lender or CDC due to the SBA
Supervised Lender's or CDC's default under its agreement(s) with SBA
would be irreparable and the amount of damage would be difficult to
ascertain, making this relief necessary. The consent to receivership
does not mandate the appointment of a receiver in connection with every
enforcement action. SBA will review the facts and circumstances of the
enforcement action when deciding whether or not to seek the appointment
of a receiver and in determining the scope of the receiver's duties and
powers, including whether the receiver's duties and powers will be
limited to taking possession of, servicing and/or selling or
transferring the 7(a) or 504 loan portfolios.
Section 120.1600 General procedures for enforcement actions against
SBA Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management
Officials, Other Persons, Intermediaries, and NTAPs. SBA proposed to
add language regarding the procedures for the appointment of a receiver
over a CDC or an SBA Supervised Lender in Sec. Sec. 120.1600(a),
120.1600(a)(6) and 120.1600(b)(4). The proposed amendments allow SBA to
follow applicable procedures under Federal law to obtain the
appointment of a receiver and to enforce an SBA Supervised Lender's or
CDC's consent and waiver in advance. The comments that SBA received on
this section repeated the comments received on Sec. Sec. 120.1400 and
120.1500. SBA considered the comments received on this section, and for
the reasons stated above in response to the comments received on
Sec. Sec. 120.1400 and 120.1500, SBA has determined the proposed
amendments to Sec. 120.1600 will provide the Agency added flexibility
in protecting and safeguarding the security and integrity of the
federally funded 7(a) and 504 Loan Programs. SBA is amending this
section as proposed.
Section 120.1707 Seller's retained Loan Interest. SBA proposed to
replace the execution of a new First Lien Position 504 Loan Pool
Guarantee Agreement with an allonge. This would obligate the purchaser
of a Seller Receipt in the First Lien Position 504 Loan Pooling
(``FMLP'') Program to the same terms and conditions of the First Lien
Position 504 Loan Pool Guarantee Agreement. No comments were received.
SBA is adopting the change into the final rule as proposed.
Subpart K--Establishment of an SBA Direct Loan Program for
Systemically Important Secondary Market Broker-Dealers (SISMBD Loan
Program). SBA proposed to remove Sec. Sec. 120.1800 through 120.1900.
These regulations relate to rules which establish a temporary, short-
term loan program for systemically-important secondary market broker-
dealers. Sections 120.1800-120.1893 set forth the program participation
criteria and the conditions under which qualified participants could
obtain secured debt financing from SBA. Section 120.1900 established a
sunset date for the program of no later than February 16, 2011, with
all loan proceeds due to be paid in full by no later than February 16,
2013. SBA received seven comments on its proposal to remove these
regulations. All commenters supported the removal of the regulation
and, as a result, SBA is removing these regulations in the Final Rule.
Compliance with Executive Orders 12866, 12988, 13132, 13563, 13771,
and 13777, the Paperwork Reduction Act (44 U.S.C., Ch. 35), and the
Regulatory Flexibility Act (5 U.S.C. 601-612).
Executive Order 12866
This final rule is the result of a proposed rule that the Office of
Management and Budget (OMB) determined is not a ``significant''
regulatory action for the purposes of Executive Order 12866. This is
not a major rule under the Congressional Review Act, 5 U.S.C. 800.
Executive Order 12988
This action meets applicable standards set forth in sections 3(a)
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden. The action does not
have retroactive or preemptive effect.
Executive Order 13132
SBA has determined that this final rule will not have substantial,
direct effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, for
the purposes of Executive Order 13132, SBA has determined that this
proposed rule has no federalism implications warranting preparation of
a federalism assessment.
Executive Order 13563
SBA's Business Loan Programs operate through the Agency's lending
partners, which are 7(a) Lenders for the 7(a) Loan Program, Third Party
Lenders and CDCs for the 504 Loan Program, Microloan Intermediaries for
the Microloan Program, and ILP Intermediaries for the ILP Program.
SBA's SBG Program operates through Surety Bond Companies. The Agency
has participated in public forums and meetings which have included
outreach to hundreds of its lending partners and surety bond companies
to seek valuable
[[Page 39500]]
insight, guidance, and suggestions for program reform.
Executive Orders 13771 and 13777
On January 30, 2017, President Trump signed Executive Order 13771,
Reducing Regulation and Controlling Regulatory Costs, which, among
other objectives, is intended to ensure that an agency's regulatory
costs are prudently managed and controlled so as to minimize the
compliance burden imposed on the public. For every significant
regulation an agency proposes to implement, this Executive Order
requires the agency to (i) identify at least two existing regulations
that the agency can cancel; and (ii) use the cost savings from the
cancelled regulations to offset the cost of the new regulation. On
February 24, 2017, the President issued Executive Order 13777,
Enforcing the Regulatory Agenda, which further emphasized the goal of
the Administration to alleviate the regulatory burdens placed on the
public. Under Executive Order 13777, agencies must evaluate their
existing regulations to determine which ones should be repealed,
replaced, or modified. In doing so, agencies should focus on
identifying regulations that, among other things, eliminate jobs or
inhibit job creation; are outdated, unnecessary or ineffective; impose
costs that exceed benefits; create a serious inconsistency or otherwise
interfere with regulatory reform initiatives and policies; or
implemented Executive Orders or other Presidential directives that have
been rescinded or substantially modified. SBA has reviewed this final
rule in light of these two new Executive Orders.
Regulation elimination as proposed for this rule will eliminate
duplication of effort costs for sureties, lenders and certified
development companies to develop computerized forms and sun-sets two
prior SBA initiatives the CLP lender designations and the SBA Director
Program for Systematically Important Secondary Market Broker-Dealers
(SISMD Loan Program). The cost savings of sun-setting the two programs
have already been absorbed by SBA so no further cost savings is
anticipated.
The final rule increases the Quick Bond eligible contract limit in
Sec. 115.30 from $250,000 to $400,000. This action reduces
administrative burden that results in cost savings to the sureties.
The following 29 regulations are removed as of the publication of
this Federal Register document:
(1) 13 CFR 120.194 Use of computer forms
(2) 13 CFR 120.441 How does a Lender become a CLP Lender
Subpart K--Establishment of an SBA Direct Program for
Systematically Important Secondary Market Broker-Dealers (SISMD Loan
Program) which consists of the following regulations:
(3) 13 CFR 120.1800 Definitions used in subpart K
(4) 13 CFR 120.1801 Program Purpose
(5) 13 CFR 120.1802 How does a broker-dealer participate in the
SISMID Loan Program?
(6) 13 CFR 120.1810 What is a Systematically Important SBA
Secondary Market Broker-Dealer (SISMBD)?
(7) 13 CFR 120.1820 What are the basic eligibility requirements for
SBA designation as a Systemically Important Secondary Market Broker-
Dealer?
(8) 13 CFR 120.1821 What is the process to obtain designation as a
Systematically Important Secondary Market Broker-Dealer?
(9) 13 CFR 120.1822 What is the process to apply for an SISMBD
Loan?
(10) 13 CFR 120.1823 Creditworthiness
(11) 13 CFR 120.1824 How will an SISMBD receive notice of an
approval of denial of a loan or request for an advance under an SISMBD
Loan?
(12) 13 CFR 120.1825 May an SISMBD request reconsideration after
denial?
(13) 13 CFR 120.1830 What are the terms and conditions of an SBA
loan to an SISMBD?
(14) 13 CFR 120.1831 Is there a limit to the number of SISMBD Loans
or advances that an SISMBD may request from SBA?
(15) 13 CFR 120.1832 What is the minimum and maximum SISMBD Loan
advance amount?
(16) 13 CFR 120.1833 May an SISMBD request an increase in the loan
amounts?
(17) 13 CFR 120.1834 What fees are associated with an SISMBD Loan?
(18) 13 CFR 120.1840 What are the allowable uses of proceeds of an
SISMBD Loan?
(19) 13 CFR 120.1850 Will the Collateral be held by SBA?
(20) 13 CFR 120.1860 How will the SISMBD Loan be disbursed?
(21) 13 CFR 120.1870 How does the SISMBD provide funds for the
Premium?
(22) 13 CFR 120.1880 How will the loan be repaid?
(23) 13 CFR 120.1881 How are payments on the Collateral allocated
between the SISMBD borrower and repayment of the SISMBD Loan?
(24) 13 CFR 120.1882 What happens if funds to make required loan
payments are not generated from the Collateral?
(25) 13 CFR 120.1890 What is the maturity on a SISMBD Loan from
SBA?
(26) 13 CFR 120.1891 What happens if an SISMBD is ineligible to
receive an SISMBD Loan or an adverse?
(27) 13 CFR 120.1892 What happens if an SISMBD does not use SISMBD
Loan funds for a statutorily mandated purpose?
(28) 13 CFR 120.1893 Data collections and reporting
(29) 13 CFR 120.1900 When does the Secondary Market Lending
Authority Program end?
Paperwork Reduction Act, 44 U.S.C., Ch. 35
SBA has determined that this final rule imposes additional
reporting requirements under the Paperwork Reduction Act (PRA). As
described above, SBA proposed to require all participating sureties to
notify SBA of all contracts that were successfully completed on a
quarterly basis. SBA invited the public to comment on this proposed new
report and to submit any comments by October 11, 2016.
SBA invited comments on: (1) Whether the proposed collection of
information is necessary for the proper performance of SBA's functions,
including whether the information will have a practical utility; (2)
the accuracy of SBA's estimate of the burden of the proposed collection
of information, including the validity of the methodology and
assumptions used; (3) ways to enhance the quality, utility, and clarity
of the information to be collected; and (4) ways to minimize the burden
of the collection of information on respondents, including through the
use of automated collection techniques, when appropriate, and other
forms of information technology. Three comments were received related
to the requirement of this proposed form. A discussion of the comments
received is included in the section-by-section analysis of Sec.
115.22. As stated above, SBA considered the comments, but will proceed
with requiring the form as proposed. SBA will submit the final form and
other documents required under the Paperwork Reduction Act to OMB for
review and approval.
A summary description of this information collection, the
respondents, and the estimate of the annual hour burden resulting from
this new process is provided below. Included in the estimate is the
time for reviewing instructions, searching existing data sources,
gathering information needed, and completing and reviewing the
responses.
Title: Quarterly Contract Completion Report (SBA Form 2461).
[[Page 39501]]
Description: The Quarterly Contract Completion Report will be
submitted by all participating surety companies to provide SBA with
information about successfully completed contracts. The information
reported will include the Surety Bond Guarantee number, the name of the
Principal, the original Contract dollar amount, the revised Contract
dollar amount (if applicable), the date of Contract completion, and a
fee recap. Reports will be due to SBA within 45 days of each fiscal
quarter end.
OMB Control Number: 3245-0395.
Description of and Estimated Number of Respondents: The collection
will be submitted by the surety companies that participate in the SBG
Program. The burden estimate for this requirement is based on the 30
current participants.
Estimated Number of Responses: Each of the estimated 30 sureties
would be required to submit the report to SBA four times per year, for
a total of 120 responses.
Estimated Response Time: It is estimated that each surety would
need approximately one hour to complete the proposed report.
Total Estimated Annual Hour Burden: 120 hours.
Estimated Annual Cost Burden: $6,005.
Regulatory Flexibility Act, 5 U.S.C. 601-612
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601-612, requires the agency to
``prepare and make available for public comment an initial regulatory
analysis'' which will ``describe the impact of the proposed rule on
small entities.'' Section 605 of the RFA allows an agency to certify a
rule, in lieu of preparing an analysis, if the proposed rulemaking is
not expected to have a significant economic impact on a substantial
number of small entities. Currently, there are 30 Sureties that
participate in the SBG Program, and no part of this rule would impose
any significant cost or burden on them. Although the rulemaking will
impact all of the approximately 6,000 7(a) Lenders (some of which are
small), all of the approximately 230 CDCs (all of which are small), all
of the approximately 145 Microloan Intermediaries (most of which are
small), and all of the approximately 35 ILP Intermediaries (most of
which are small), SBA does not believe the impact will be significant.
This rule will reduce the burden of the Agency's lending partners
because they choose their own level of program participation (i.e.,
7(a) Lenders and CDCs are not required to process more loan
applications simply because there is a reduced burden for small
businesses to apply for a business loan). Therefore, the proposed
modernization of certain program participation requirements would not
have a substantial economic impact or cost on the small business
borrower, lender, or CDC, and in fact, may reduce costs to lender
participants.
SBA's final rule encompasses clear and transparent best practice
guidance that aligns with the Agency's mission to increase access to
capital for small businesses and facilitate American job preservation
and creation by removing unnecessary regulatory requirements. A review
of the summary and preamble provides more detailed discussion on the
specific improvements that will reduce regulatory burdens and encourage
increased program participation. For these reasons, SBA has determined
that there is no negative impact on a substantial number of small
entities.
List of Subjects
13 CFR Part 109
Community development, Loan programs-business, Reporting and
recordkeeping requirements, Small businesses, Intermediary lending
pilot program.
13 CFR Part 115
Claims, Reporting and recordkeeping requirements, Small businesses,
Surety bonds.
13 CFR Part 120
Community development, Equal employment opportunity, Loan
programs--business, Reporting and recordkeeping requirements, Small
businesses.
For the reasons stated in the preamble, SBA amends 13 CFR parts
109, 115, and 120 as follows:
PART 109--INTERMEDIARY LENDING PILOT PROGRAM
0
1. The authority citation for part 109 continues to read as follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), and 636(l).
Sec. 109.400 [Amended]
0
2. Amend Sec. 109.400 by removing and reserving paragraph (b)(12).
0
3. Revise Sec. 109.510 to read as follows:
Sec. 109.510 Reviews.
(a) General. SBA may conduct reviews and monitoring of ILP
Intermediaries, including ILP Intermediaries' self-assessments. SBA may
also perform reviews of ILP Intermediaries as needed, as determined by
SBA in its discretion.
(b) Corrective actions. SBA may require an ILP Intermediary to take
corrective actions to address findings from reviews. Failure to take
required corrective actions may constitute an event of default, as
described in Sec. 109.520(c).
(c) Confidentiality of reports. Review reports and other SBA
prepared review related documents are subject to the confidentiality
requirements of Sec. 120.1060.
PART 115--SURETY BOND GUARANTEE
0
4. The authority citation for part 115 continues to read as follows:
Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.
Sec. 115.19 [Amended]
0
5. Amend Sec. 115.19 by removing the phrase ``$100,000, whichever is
less'' and by adding in its place the phrase ``$500,000 of the original
contract or bond amount, whichever is less'' in paragraph (c)(1), the
second sentence of paragraph (d), and paragraph (e)(2).
0
6. Add Sec. 115.22 to subpart A to read as follows:
Sec. 115.22 Quarterly Contract Completion Report.
The Surety must submit a Quarterly Contract Completion Report
within 45 days after the close of each fiscal year quarter ending
December 31, March 31, June 30, and September 30, that identifies each
contract successfully completed during the quarter. The report shall
include:
(a) The SBA Surety Bond Guarantee Number,
(b) Name of the Principal,
(c) The original Contract Dollar Amount,
(d) The revised Contract Dollar Amount (if applicable),
(e) The date of Contract completion, and
(f) A summary specifying the fee amounts paid to SBA by the Surety
and Principal, the fee amounts due to SBA as a result of any increases
in the Contract amount, and the fee amounts to be refunded to the
Principal or rebated to the Surety as a result of any decreases in the
Contract amount.
Sec. 115.30 [Amended]
0
7. Amend Sec. 115.30 by removing ``$250,000'' from the second sentence
of paragraph (d)(2)(i) and adding in its place ``$400,000.''
[[Page 39502]]
Sec. 115.32 [Amended]
0
8. Amend Sec. 115.32 by removing the phrase ``or $100,000, whichever
is less'' and adding in its place the phrase ``or $500,000 of the
original contract or bond amount, whichever is less'' after ``25%'' in
the first and second sentences of paragraph (d)(1).
0
9. Amend Sec. 115.60 by adding third and fourth sentences at the end
of paragraph (b) to read as follows:
Sec. 115.60 Selection and admission of PSB Sureties.
* * * * *
(b) * * * For a period of nine months following admission to the
PSB program, the Surety must obtain SBA's prior written approval before
executing a bond greater than $2 million so that SBA may evaluate the
Surety's performance in its underwriting and claims and recovery
functions. At the end of this nine month period, SBA may in its
discretion extend this period to allow SBA to further evaluate the
Surety's performance.
0
10. Amend Sec. 115.67 by revising the second sentence of paragraph (a)
to read as follows:
Sec. 115.67 Changes in Contract or bond amount.
(a) * * * The Surety must present checks for additional fees due
from the Principal and the Surety on any increases aggregating 25% of
the original Contract or bond amount or $500,000, whichever is less,
and attach such payments to the respective monthly bordereau. * * *
* * * * *
0
11. Revise Sec. 115.68 to read as follows:
Sec. 115.68 Guarantee percentage.
SBA reimburses a PSB Surety in the same percentages and under the
same terms as set forth in Sec. 115.31.
PART 120--BUSINESS LOANS
0
12. The authority citation for part 120 is revised to read as follows:
Authority: 15 U.S.C. 634(b)(6), (b)(7), (b)(14), (h) and note,
636(a), (h) and (m), 650, 687(f), 696(3) and 697(a) and (e); Pub. L.
111-5, 123 Stat. 115; Pub. L. 111-240, 124 Stat. 2504; Pub. L. 114-
38, 129 Stat. 437.
Sec. 120.110 [Amended]
0
13. Amend Sec. 120.110 by removing and reserving paragraph (l).
0
14. Amend Sec. 120.111 by revising the introductory text and
paragraphs (a)(3) and (6) to read as follows:
Sec. 120.111 What conditions must an Eligible Passive Company
satisfy?
An Eligible Passive Company must use loan proceeds only to acquire
or lease, and/or improve or renovate, real or personal property
(including eligible refinancing), that it leases to one or more
Operating Companies for conducting the Operating Company's business, or
to finance a change of ownership between the existing owners of the
Eligible Passive Company. When the Operating Company is a
co[hyphen]borrower on the loan, loan proceeds also may be used by the
Operating Company for working capital and/or the purchase of other
assets, including intangible assets, for the Operating Company's use as
provided in paragraph (a)(5) of this section. (References to Operating
Company in paragraphs (a) and (b) of this section mean each Operating
Company.) In the 504 loan program, if the Eligible Passive Company owns
assets in addition to the real estate or other eligible long-term fixed
assets, loan proceeds may not be used to finance a change of ownership
between existing owners of the Eligible Passive Company unless the
additional assets owned by the Eligible Passive Company are directly
related to the real estate or other eligible long-term fixed assets,
the amount attributable to the additional assets is de minimis, and the
additional assets are excluded from the Project financing. Any
ownership structure or legal form may qualify as an Eligible Passive
Company. Any ownership structure or legal form may qualify as an
Eligible Passive Company.
(a) * * *
(3) The lease between the Eligible Passive Company and the
Operating Company must be in writing and must be subordinate to SBA's
mortgage, trust deed lien, or security interest on the property. The
Eligible Passive Company (as landlord) must furnish as collateral for
the loan an assignment of all rents paid under the lease. The rent or
lease payments cannot exceed the amount necessary to make the loan
payment to the lender, and an additional amount to cover the Eligible
Passive Company's direct expenses of holding the property, such as
maintenance, insurance and property taxes;
* * * * *
(6) Each holder of an ownership interest constituting at least 20
percent of either the Eligible Passive Company or the Operating Company
must guarantee the loan. The trustee shall execute the guaranty on
behalf of any trust. When deemed necessary for credit or other reasons,
SBA or, for a loan processed under an SBA Lender's delegated authority,
the SBA Lender may require other appropriate individuals or entities to
provide full or limited guarantees of the loan without regard to the
percentage of their ownership interests, if any.
* * * * *
0
15. Amend Sec. 120.130 by redesigning paragraphs (e) and (f) as
paragraphs (f) and (g) respectively, adding new paragraph (e), and
revising newly redesignated paragraph (g).
The addition and revision read as follows:
Sec. 120.130 Restrictions on uses proceeds.
* * * * *
(e) The applicant may not use any of the proceeds to pay past-due
Federal, state, or local payroll taxes, sales taxes, or other similar
taxes that are required to be collected by the applicant and held in
trust on behalf of a Federal, state, or local government entity.
* * * * *
(g) Any use restricted by Sec. Sec. 120.201, 120.202, and 120.884
(specific to 7(a) loans and 504 loans respectively).
0
16. Amend Sec. 120.160 by revising the second sentence of paragraph
(a) and by removing paragraph (d).
The revision reads as follows:
Sec. 120.160 Loan conditions.
* * * * *
(a) * * * When deemed necessary for credit or other reasons, SBA
or, for a loan processed under an SBA Lender's delegated authority, the
SBA Lender, may require other appropriate individuals or entities to
provide full or limited guarantees of the loan without regard to the
percentage of their ownership interests, if any.
* * * * *
Sec. 120.194 [Removed and Reserved]
0
17. Remove and reserve Sec. 120.194.
0
18. Amend Sec. 120.220 by adding paragraph (a)(3), revising the first,
second, and third sentences of paragraph (b), and removing the first
two sentences of paragraph (c).
The addition and revisions read as follows:
Sec. 120.220 Fees that Lender pays SBA.
* * * * *
(a) * * *
(3) For loans approved under section 7(a)(31) of the Small Business
Act (SBA Express loans) to veterans and/or the spouse of a veteran. In
fiscal years when the 7(a) program is at zero subsidy, SBA will not
collect a guarantee fee in connection with a loan made under section
7(a)(31) of the Small Business Act to a business owned and controlled
by a veteran or the spouse of a veteran.
(b) * * * For a loan with a maturity of twelve (12) months or less,
the Lender must pay the guaranty fee to
[[Page 39503]]
SBA electronically within 10 business days after receiving SBA loan
approval. The Lender may only charge the Borrower for the fee after the
Lender pays the guaranty fee. For a loan with a maturity in excess of
twelve (12) months, the Lender must pay the guaranty fee to SBA
electronically within 90 days after SBA gives its loan approval. * * *
* * * * *
0
19. Amend Sec. 120.221 by revising the section heading, adding
introductory text, and revising paragraph (e) to read as follows:
Sec. 120.221 Fees and expenses which the Lender may collect from a
loan applicant or Borrower.
Unless otherwise allowed by SBA Loan Program Requirements, the
Lender may charge and collect from the applicant or Borrower only the
following fees and expenses:
* * * * *
(e) Legal services. Lender may charge the Borrower for legal
services rendered on an hourly basis.
0
20. Revise Sec. 120.222 to read as follows:
Sec. 120.222 Prohibition on sharing premiums for secondary market
sales.
The Lender or its Associates may not share in any premium received
from the sale of an SBA guaranteed loan in the secondary market with a
Service Provider, packager, or other loan-referral source.
Sec. 120.394 [Amended]
0
21. Amend Sec. 120.394 in the third sentence by removing the number
``20'' and adding in its place the number ``33''.
Sec. 120.400 [Amended]
0
22. Amend Sec. 120.400 by removing the phrase ``Sec. Sec. 120.441(b)
and 120.451(d)'' and adding in its place ``Sec. 120.440(c)''.
0
23. Amend Sec. 120.410 in paragraph (a)(2) by removing the term ``on-
site'' and by revising paragraph (e).
The revision reads as follows:
Sec. 120.410 Requirements for all participating Lenders.
* * * * *
(e) Be in good standing with SBA, as defined in Sec. 120.420(f)
(and determined by SBA in its discretion), and, as applicable, with its
state regulator and be considered Satisfactory by its Federal Financial
Institution Regulator (as determined by SBA and based on, for example,
information in published orders/agreements and call reports); and
* * * * *
Sec. 120.424 [Amended]
0
24. In Sec. 120.424, amend paragraph (b) by removing the term ``on-
site''.
Sec. 120.433 [Amended]
0
25. In Sec. 120.433, amend paragraph (b) by removing the term ``on-
site''.
Sec. 120.434 [Amended]
0
26. In Sec. 120.434, amend paragraph (c) by removing the term ``on-
site''.
0
27. Revise the undesignated center heading following Sec. 120.435 to
read ``Delegated Authority Criteria''.
0
28. Revise Sec. 120.440 to read as follows:
Sec. 120.440 How does a 7(a) Lender obtain delegated authority?
(a) In making its decision to grant or renew a delegated authority,
SBA considers whether the Lender, as determined by SBA in its
discretion:
(1) Has the continuing ability to evaluate, process, close,
disburse, service, liquidate and litigate SBA loans. This includes the
ability to develop and analyze complete loan packages. SBA may consider
the experience and capability of Lender's management and staff.
(2) Has satisfactory SBA performance (as defined in Sec.
120.410(a)(2));
(3) Is in compliance with SBA Loan Program Requirements (e.g., Form
1502 reporting, timely payment of all fees to SBA);
(4) Has completed to SBA's satisfaction all required corrective
actions;
(5) Whether Lender is subject to any enforcement action, order or
agreement with a regulator or the presence of other regulatory concerns
as determined by SBA; and
(6) Whether Lender exhibits other risk factors (e.g., has rapid
growth; low SBA activity; SBA loan volume; Lender, an officer or
director is under investigation or indictment).
(b) Delegated authority decisions are made by the appropriate SBA
official in accordance with Delegations of Authority, and are final.
(c) If delegated authority is approved or renewed, Lender must
execute a Supplemental Guarantee Agreement, which will specify a term
not to exceed two years. SBA may grant shortened renewals based on risk
or any of the other delegated authority criteria. Lenders with less
than 3 years of SBA lending experience will be limited to a term of 1
year or less.
Sec. 120.441 [Removed and Reserved]
0
29. Remove and reserve Sec. 120.441.
Sec. 120.451 [Removed and Reserved]
0
30. Remove and reserve Sec. 120.451.
0
31. Amend Sec. 120.524 by revising paragraph (b) to read as follows:
Sec. 120.524 When is SBA released from liability on its guarantee?
* * * * *
(b) If SBA determines, at any time, that any of the events set
forth in paragraph (a) of this section occurred in connection with that
loan, SBA is entitled to recover any moneys paid on the guarantee plus
interest from the Lender. In the exercise of its rights, SBA may
utilize all legal means available, including offset and judicial
remedies.
* * * * *
0
32. Amend Sec. 120.630 by revising paragraph (a)(4) and in paragraph
(a)(5) by removing the term ``on-site''.
The revision reads as follows:
Sec. 120.630 Qualifications to be a Pool Assembler.
(a) * * *
(4) Is in good standing with SBA (as the D/FA determines in his or
her discretion), and is Satisfactory with the Office of the Comptroller
of the Currency (``OCC'') if it is a national bank, the Federal Deposit
Insurance Corporation if it is a bank not regulated by the OCC, or the
Financial Industry Regulatory Authority (``FINRA'') if it is a member
as determined by SBA.
* * * * *
0
33. Amend Sec. 120.660 by:
0
a. Revising paragraphs (a) introductory text, (a)(1)(ii), and (a)(2);
0
b. Adding paragraph (a)(3);
0
c. Revising paragraph (c); and
0
d. Adding paragraph (d).
The revisions and additions read as follows:
Sec. 120.660 Suspension or revocation.
(a) Temporary suspension or revocation of Lender, broker, dealer,
or Registered Holder for violation of Secondary Market rules and
regulations or other risks to SBA. The D/FA together with the Director,
Office of Credit Risk Management (D/OCRM) may suspend for a period of
no more than 120 calendar days or revoke for a period of no more than
two (2) years, the privilege of a Lender, broker, dealer, or Registered
Holder to sell, purchase, broker, or deal in loans or Certificates for:
(1) * * *
(ii) Any provisions in the contracts entered into by the parties,
including SBA Forms 1086, 1088 and 1454;
(2) Knowingly submitting false or fraudulent information to the SBA
or FTA; or
(3) A Lender's receipt, from its primary Federal or state regulator
[[Page 39504]]
(including SBA), of a cease and desist order, a consent agreement
affecting capital or commercial lending issues, a supervisory action
citing unsafe or unsound banking practices, or any other supervisory
action a primary regulator establishes hereafter that addresses unsafe
or unsound lending practices; or a going concern opinion issued by the
Lender's auditor. A Lender subject to a public action or going concern
opinion must notify the D/FA and the D/OCRM within five (5) business
days (or as soon as practicable thereafter) of the public issuance of
any such action or the issuance of a going concern opinion. The Lender
notice shall include copies of all relevant documents for SBA review.
* * * * *
(c) Notice to suspend or revoke. The D/FA and the D/OCRM shall
notify the affected party in writing, providing the reasons therefore,
at least 10 business days prior to the effective date of the suspension
or revocation. The affected party may appeal the suspension or
revocation made under this section pursuant to the procedures set forth
in part 134 of this chapter. The action taken by the D/FA and the D/
OCRM will remain in effect pending resolution of the appeal.
(d) Early termination of suspension or revocation. SBA may, by
written notice, terminate a Secondary Market suspension or revocation
under this section, if the D/FA and the D/OCRM, in their sole
discretion, determine that such termination is warranted for good
cause.
Sec. 120.710 [Amended]
0
34. Amend Sec. 120.710 by removing the term ``on-site'' from the third
sentence of paragraph (e)(1).
0
35. Amend Sec. 120.812 by revising the last sentence of paragraph (c)
to read as follows:
Sec. 120.812 Probationary period for newly certified CDCs.
* * * * *
(c) * * * Other factors may include, but are not limited to,
review/examination assessments, historical performance measures, loan
volume to the extent that it impacts performance measures, and other
performance related measurements and information (such as contribution
toward SBA mission).
* * * * *
0
36. Amend Sec. 120.816 by revising the last sentence of paragraph (c)
to read as follows:
Sec. 120.816 CDC non-profit status and good standing.
* * * * *
(c) * * * Other factors may include, but are not limited to,
review/examination assessments, historical performance measures, loan
volume to the extent that it impacts performance measures, and other
performance related measurements and information (such as contribution
toward SBA mission).
0
37. Amend Sec. 120.823 by revising paragraphs (c)(5) and (d)(4)(ii)(A)
through (C) and (E) to read as follows:
Sec. 120.823 CDC Board of Directors.
* * * * *
(c) * * *
(5) No CDC Board member may serve on the Board of another CDC.
(d) * * *
(4) * * *
(ii) * * *
(A) Be chosen by the Board of Directors, and consist of individuals
with a background in either financial risk management, commercial
lending, or legal issues relating to commercial lending who are not
associated with another CDC;
(B) Have a Quorum of at least five (5) Loan Committee members
authorized to vote;
(C) Have at least two (2) Loan Committee members with commercial
lending experience satisfactory to SBA;
* * * * *
(E) Consist of Loan Committee members who live or work in the Area
of Operations of the State where the 504 project they are voting on is
located unless the project falls under one of the exceptions listed in
Sec. 120.839.
* * * * *
0
38. Amend Sec. 120.839 by revising the introductory text to read as
follows:
Sec. 120.839 Case-by-case application to make a 504 loan outside of a
CDC's Area of Operations.
A CDC may apply to make a 504 loan for a Project outside its Area
of Operations by submitting a request to the 504 loan processing
center. The applicant CDC must demonstrate that it can adequately
fulfill its 504 program responsibilities for the 504 loan, including
proper servicing. In addition, the CDC must have satisfactory SBA
performance, as determined by SBA in its discretion. The CDC's Risk
Rating, among other factors, will be considered in determining
satisfactory SBA performance. Other factors may include, but are not
limited to, review/examination assessments, historical performance
measures, loan volume to the extent that it impacts performance
measures, and other performance related measurements and information
(such as contribution toward SBA mission). The 504 loan processing
center may approve the application if:
* * * * *
0
39. Amend Sec. 120.841 by revising the last sentence of paragraph (c)
to read as follows:
Sec. 120.841 Qualifications for the ALP.
* * * * *
(c) * * * Other factors may include, but are not limited to,
review/examination assessments, historical performance measures, loan
volume to the extent that it impacts performance measures, and other
performance related measurements and information (such as contribution
toward SBA mission);
* * * * *
0
40. Amend Sec. 120.884 by revising paragraph (e)(3) to read as
follows:
Sec. 120.884 Ineligible costs for 504 loans.
* * * * *
(e) * * *
(3) Construction equipment (except for heavy duty construction
equipment integral to the business' operations with a remaining useful
life of a minimum of 10 years).
0
41. Amend Sec. 120.1025 by revising the section heading and removing
the phrase ``off-site reviews and monitoring'' and adding in its place
``monitoring''.
The revision reads as follows:
Sec. 120.1025 Monitoring.
* * * * *
0
42. Amend Sec. 120.1050 by revising the section heading and removing
the phrase ``on-site'' wherever it occurs.
The revision reads as follows:
Sec. 120.1050 Reviews and examinations.
* * * * *
0
43. Amend Sec. 120.1051 by revising the section heading, removing the
phrase ``on-site'' from the introductory text, and revising paragraph
(a).
The revisions read as follows:
Sec. 120.1051 Frequency of reviews and examinations.
* * * * *
(a) Results of monitoring, including an SBA Lender's,
Intermediary's or NTAP's Risk Rating;
* * * * *
0
44. Amend Sec. 120.1060 by revising paragraph (b) to read as follows:
[[Page 39505]]
Sec. 120.1060 Confidentiality of Reports, Risk Ratings and related
Confidential Information.
* * * * *
(b) Disclosure prohibition. Each SBA Lender, Intermediary, and NTAP
is prohibited from disclosing its Report, Risk Rating, and Confidential
Information, in full or in part, in any manner, without SBA's prior
written permission. An SBA Lender, Intermediary, and NTAP may use the
Report, Risk Rating, and Confidential Information for confidential use
within its own immediate corporate organization. SBA Lenders,
Intermediaries, and NTAPs must restrict access to their Report, Risk
Rating and Confidential Information to their respective parent
entities, officers, directors, employees, auditors and consultants, in
each case who demonstrate a legitimate need to know such information
for the purpose of assisting in improving the SBA Lender's,
Intermediary's, or NTAP's SBA program operations in conjunction with
SBA's Program and SBA's portfolio management (for purposes of this
regulation, each referred to as a ``permitted party''), and to those
for whom SBA has approved access by prior written consent, and those
for whom access is required by applicable law or legal process. If such
law or process requires SBA Lender, Intermediary, or NTAP to disclose
the Report, Risk Rating, or Confidential Information to any person
other than a permitted party, SBA Lender, Intermediary, or NTAP will
promptly notify SBA and SBA's Information Provider in writing and in
advance of such disclosure so that SBA and the Information Provider
have, within their discretion, the opportunity to seek appropriate
relief such as an injunction or protective order prior to disclosure.
For purposes of this regulation, ``consultants'' means only those
consultants that are under written contract with an SBA Lender,
Intermediary or NTAP specifically to assist with addressing its Report
Findings and Corrective Actions to SBA's satisfaction. The consultant
contract must provide for both the consultant's agreement to abide by
the disclosure prohibition in this paragraph and the consultant's
agreement not to use the Report, Risk Rating, and Confidential
Information for any purpose other than to assist with addressing the
Report Findings and Corrective Actions. ``Information Provider'' means
any contractor that provides SBA with the Risk Rating. Each SBA Lender,
Intermediary, and NTAP must ensure that each permitted party is aware
of and agrees to these regulatory requirements and must ensure that
each such permitted party abides by them. Any disclosure of the Report,
Risk Rating, or Confidential Information other than as permitted by
this regulation may result in appropriate action as authorized by law.
An SBA Lender, Intermediary, and NTAP will indemnify and hold harmless
SBA from and against any and all claims, demands, suits, actions, and
liabilities to any degree based upon or resulting from any unauthorized
use or disclosure of the Report, Risk Rating, or Confidential
Information. Information Provider contact information is available from
the Office of Capital Access.
0
45. Amend Sec. 120.1070 by:
0
a. Revising the section heading;
0
b. Revising paragraphs (a)(1) through (4);
0
c. Redesignating paragraphs (b) and (c) as paragraphs (c) and (d),
respectively;
0
d. Adding a new paragraph (b);
0
e. Revising the first and second sentences of newly redesignated
paragraph (c); and
0
f. Revising the final sentence of newly redesignated paragraph (d)
The addition and revisions read as follows:
Sec. 120.1070 SBA Lender oversight fees.
* * * * *
(a) * * *
(1) Examinations. The costs of conducting a safety and soundness
examination and related activities of an SBA-Supervised Lender,
including any expenses that are incurred in relation to the examination
and such activities.
(2) Reviews. The costs of conducting a review of a 7(a) Lender or a
7(a) Lender's loans, and related review activities (e.g., corrective
action assessments, delegated loan reviews), including any expenses
that are incurred in relation to the review and such activities.
(3) Monitoring. The costs of conducting monitoring reviews of a
7(a) Lender, including any expenses that are incurred in relation to
the monitoring review activities.
(4) Other lender oversight activities. The costs of additional
expenses that SBA incurs in carrying out other lender oversight
activities (for example, the salaries and travel expenses of SBA
employees and equipment expenses that are directly related to carrying
out lender oversight activities, technical assistance and analytics to
support the monitoring and review program, and supervision and
enforcement activity costs).
(b) Allocation. SBA will assess to 7(a) Lender(s) the costs
associated with the review, examination, monitoring, or other lender
oversight activity, as determined by SBA in its discretion. In general:
(1) Where the costs that SBA incurs for a review, exam, monitoring
or other lender oversight activity are specific to a particular 7(a)
Lender, SBA will charge that 7(a) Lender a fee for the actual costs of
conducting the review, exam, monitoring or other lender oversight
activity; and
(2) Where the costs that SBA incurs for the lender oversight
activity are not sufficiently specific to a particular Lender, SBA will
assess a fee based on each 7(a) Lender's portion of the total dollar
amount of SBA guarantees in SBA's total portfolio or in the relevant
portfolio segment being reviewed or examined, to cover the costs of
such activity. SBA may waive the assessment of this fee for all 7(a)
Lenders owing less than a threshold amount below which SBA determines
that it is not cost effective to collect the fee.
(c) * * * For the examinations or reviews conducted under
paragraphs (a)(1) and (2) of this section, SBA will bill each 7(a)
Lender for the amount owed following completion of the examination,
review or related activity. For monitoring conducted under paragraph
(a)(3) of this section and the other lender oversight activity expenses
incurred under paragraph (a)(4) of this section, SBA will bill each
7(a) Lender for the amount owed on an annual basis. * * *
(d) * * * In addition, a 7(a) Lender's failure to pay any of the
fee components described in this section, or to pay interest, charges
and penalties that have been charged, may result in a decision to
suspend or revoke a participant's eligibility, limit a participant's
delegated authority, or other remedy available under law.
0
46. Effective October 20, 2017, amend Sec. 120.1400 by revising
paragraph (a) to read as follows:
120.1400 Grounds for enforcement actions--SBA Lenders.
(a) Agreements. By making SBA 7(a) guaranteed loans or 504 loans,
SBA Lenders automatically agree to the terms, conditions, and remedies
in Loan Program Requirements, as promulgated or issued from time to
time and as if fully set forth in the SBA Form 750 (Loan Guaranty
Agreement), Development Company 504 Debenture, CDC Certification,
Servicing Agent Agreement, or other applicable participation, guaranty,
or supplemental agreement. SBA Lenders further agree
[[Page 39506]]
that a violation of Loan Program Requirements constitutes default under
their respective agreements with SBA.
(1) Additional agreements by CDCs. By obtaining approval for 504
loans after October 20, 2017, a CDC consents to the remedies in Sec.
120.1500(e)(3) and waives in advance any right it may have to contest
the validity of the appointment of a receiver. The CDC agrees that its
consent to SBA's application to a Federal court of competent
jurisdiction for appointment of a receiver of SBA's choosing, an
injunction or other equitable relief, and the CDC's consent in advance
to the court's granting of SBA's application, may be enforced upon any
basis in law or equity recognized by the court.
(2) Additional agreements by SBA Supervised Lenders (except Other
Regulated SBLCs). By making SBA 7(a) guaranteed loans after October 20,
2017, an SBA Supervised Lender (except an Other Regulated SBLC)
consents to the remedies in Sec. 120.1500(c)(3) and waives in advance
any right it may have to contest the validity of the appointment of a
receiver. The SBA Supervised Lender agrees that its consent to SBA's
application to a Federal court of competent jurisdiction for
appointment of a receiver of SBA's choosing, an injunction or other
equitable relief, and the SBA Supervised Lender's consent in advance to
the court's granting of SBA's application, may be enforced upon any
basis in law or equity recognized by the court.
* * * * *
0
47. Amend Sec. 120.1500 by revising paragraph (c)(3) and adding
paragraph (e)(3) to read as follows:
Sec. 120.1500 Types of enforcement actions--SBA Lenders.
* * * * *
(c) * * *
(3) Initiate request for appointment of receiver and/or other
relief. The SBA may make application to any Federal court of competent
jurisdiction for the court to take exclusive jurisdiction, without
notice, of an SBA Supervised Lender, and SBA shall be entitled to the
appointment of a receiver of SBA's choosing to hold, administer,
operate, and/or liquidate the SBA Supervised Lender; and to such
injunctive or other equitable relief as may be appropriate. Without
limiting the foregoing and with SBA's written consent, the receiver may
take possession of the portfolio of 7(a) loans and sell such loans to a
third party, and/or take possession of servicing activities of 7(a)
loans and sell such servicing rights to a third party.
* * * * *
(e) * * *
(3) Apply to any Federal court of competent jurisdiction for the
court to take exclusive jurisdiction, without notice, of the CDC, and
SBA shall be entitled to the appointment of a receiver of SBA's
choosing to hold, administer, operate and/or liquidate the CDC; and to
such injunctive or other equitable relief as may be appropriate.
Without limiting the foregoing and with SBA's consent, the receiver may
take possession of the portfolio of 504 loans and/or pending 504 loan
applications, including for the purpose of carrying out an enforcement
order under paragraph (e)(1) of this section.
0
48. Amend Sec. 120.1600 by:
0
a. Revising paragraph (a) introductory text;
0
b. Adding paragraph (a)(6); and
0
c. Revising paragraph (b)(4).
The revisions and addition read as follows:
Sec. 120.1600 General procedures for enforcement actions against SBA
Lenders, SBA Supervised Lenders, Other Regulated SBLCs, Management
Officials, Other Persons, Intermediaries, and NTAPs.
(a) In general. Except as otherwise set forth for the enforcement
actions listed in paragraphs (a)(6), (b) and (c) of this section, SBA
will follow the procedures listed below.
* * * * *
(6) Receiverships of Certified Development Companies and/or other
relief. If SBA undertakes the appointment of a receiver for a Certified
Development Company and/or injunctive or other equitable relief,
paragraphs (a)(1) through (5) of this section will not apply and SBA
will follow the applicable procedures under Federal law to obtain such
remedies and to enforce the Certified Development Company's consent and
waiver in advance to those remedies.
(b) * * *
(4) Receiverships, transfer of assets and servicing activities. If
SBA undertakes the appointment of a receiver for, or the transfer of
assets or servicing rights of an SBA Supervised Lender and/or
injunctive or other equitable relief, SBA will follow the applicable
procedures under Federal law to obtain such remedies and to enforce the
SBA Supervised Lender's consent and waiver in advance to those
remedies.
* * * * *
0
49. Amend Sec. 120.1703 by revising paragraph (a)(4) to read as
follows:
Sec. 120.1703 Qualifications to be a Pool Originator.
(a) * * *
(4) Is in good standing with SBA (as the SBA determines), and is
Satisfactory with the Office of the Comptroller of the Currency (OCC)
if it is a national bank, the Federal Deposit Insurance Corporation if
it is a bank not regulated by the OCC, the Financial Institutions
Regulatory Authority if it is a member, the National Credit Union
Administration if it is a credit union, as determined by SBA; and
* * * * *
0
50. Amend Sec. 120.1707 by revising the fifth sentence and adding a
sixth sentence to read as follows:
Sec. 120.1707 Seller's retained Loan Interest.
* * * In addition, in order to complete such sale, Seller must have
the purchaser of its rights to the Pool Loan execute an allonge to the
Seller's First Lien Position 504 Loan Pool Guarantee Agreement in a
form acceptable to SBA, acknowledging and accepting all terms of the
Seller's First Lien Position 504 Loan Pool Guarantee Agreement, and
deliver the executed original allonge and a copy of the corresponding
First Lien Position 504 Loan Pool Guarantee Agreement to the CSA. All
Pool Loan payments related to a Seller Receipt and Servicing Retention
Amount proposed for sale will be withheld by the CSA pending SBA
acknowledgement of receipt of all executed documents required to
complete the transfer.
Subpart K--[Removed]
0
51. Remove Subpart K, consisting of Sec. Sec. 120.1800 through
120.1900.
Dated: August 11, 2017.
Linda E. McMahon,
Administrator.
[FR Doc. 2017-17447 Filed 8-18-17; 8:45 am]
BILLING CODE 8025-01-P